Essay: Australian Income Tax - Residency Test, Factors, Waivers.

Jake while talking to a friend (Max) at a party is informed about a topic called “negative gearing”. Tax advantages were discussed so Jake is seeking your advice. He was also told about potential changes should there be a change in Government. In your own words,
explain “negative gearing” to Jake and the potential changes that may occur. In your own words, students should discuss the potential tax benefits for someone earning $100 k per year. 

Residency Test for Tax Purposes

This letter is written to you to respond on Income Tax Obligations involving residency in Australia even though this is not your native home. The most general way of determining whether a person is an Australian, is by considering the persons facts and circumstances in relation to the Common Law and Statutory test carried out to determine ones residency. One is considered an Australian Resident if the person ‘Resides’ in Australia according to the definition of the word itself meaning “dwell permanently for a considerable time” etc. This is mainly done by carrying out a test known as ‘Resident Test’. In the tax ruling TR98/17 Income Tax, it clearly outlines individuals residing in Australia although they are not natives Woellner (2010.Pg 5). One of the scenarios is that of persons entering Australia with Pre-Arranged employment contracts and this which happens to be you in this case. The following factors are considered when carrying the residency test. 

One of the factors is the purpose of presence in Australia. What I mean by this is, the way you have planned out your life determines your residency thus binding you to pay income tax as an Australian Resident. The fact that you came to Australia, bought a home and moved in immediately, clearly show that your intention is to stay in Australia permanently with your family. Thus being considered as a resident for tax purposes Pinto (Pg. 1762). 

The second factor is the registration of utility bills i.e. Telephone and electricity in your name and adding of the new kitchen to the home at a cost of $20,000. These actions of buying a home, furnishing the house with a new kitchen, registering for utility bills, clearly shows that you and family treat Australia as your home. This fact alone changes your status in the country and your tax purpose changes to that of an Australian resident Lanis (2012.Pg.98). 

The third one is the Social Living arrangements. I am referring to you joining a local gym, becoming a member and raising up to become the Local Chess club President. More so you’re children settling in well in a local school and your wife securing a part-time. This places you more as an Australian resident required to pay income tax. 

The fourth one is the fact that you and your family have been in Australia for more than half of the financial year period, shows your intention to reside in Australia and thus being considered as a resident. Moreover your wife having secured a part time job as a sales manager and enjoying her job show the intention of residing in Australia. 

Factors Affecting Residency Status

However I advise Mr. Elwood to seek waiver on double taxation from the income received from his house in America. Its stated in Tax Ruling 98/7 subsection 29 that waiver is allowed relating to double taxation and a small percentage going to the country of residency. 

Yours Sincere,

Smith Schenker

Question 2;

Jake being an Australian resident has an obligation to pay taxes informed of income tax form employment or any other income generating activity.

Item No.1

Jake received an income of $86,000 in the  that year of income 2017/2018 this amount is to be taxed under the individual tax bracket as outlined in the ATO whereby each income is classified under respective tax brackets. More so there is a tax at source withheld as Pay As You Go by the company declared and paid tax withheld of $19, 820, the company withholds this on behalf of the tax man as required by the law.

Item No.2

The Australian Tax office allows companies at some point to stand as their agents especially on issues relating to withholding or charge of tax at source especially for allowances and other form of income benefits. The same regulations have decided what is to be allowed and what not to be allowed and at times up to what range is to be allowed. Car allowance given to Jake is calculated as follows;

= $ 5000 * 0.75 = $ 3750 and the rest $1500 is withheld hence just need to allow this amount of $3750. 

Item No. 3

Ideally it is said two wrongs do not make a right hence though there exist no details of Jake at the bank especially Jake tax no, Jake has dire obligation to declare and pay tax for the interest he has earned from the bank of $100.This is likewise expected to on the bank side for purposes of accounting for deductions they do at their end inclusive of other facilitating charges

Item No.4

ATO as a tax man authority requires and expects that all taxes are paid and all dividends paid in terms of cash or cheque issuance and re-investing are declared to the authority. In the case of re-investing the authority requires that the dividend first is declared, and then the shareholder has the option to re-invest or opt not to do so. In the case of Jake the $35,000 dividend earned and declared is to be re-invested thus we must first calculate the tax on it first and maintain records of the market shares. These shared upon re-investment will facilitate calculations in order to claim capital gain tax or the loss in future if there is any reason to sell of the shares. However the employer is expected to withhold 15% of the dividend payoff. In this case there was a withholding tax of = 3,500 * 0.15 = $ 525. 

Waiver on Double Taxation

Item No.5

The fact that Jake purchased shares and sold the same shares off there exist an aspect of gain or loss on disposal hence a need for calculating the capital gain or loss on disposal. It is mostly calculated as follow;

Purchase Consideration of the share =$ 22 * 1,000 = 22000, this means that the total cost of this share is 22000, the brokerage part stands as part of capital incidental cost.

Jake then decides to sell these shares at $24 per share but only half of the number of shares thus the need to likewise calculate the cost of 500,hence=500*22=10000,therefore the 500 shares sold will fetch sales residual of=500*24=12000,

Thus allowing Jake to calculate his capital gain/loss as

 = (24*500)-(22*500) =2*500=1000, this is capital gain that is required by the law to be included in the income tax part as part of revenue. 

Item No. 6

Jakes cricket bats disposal as deemed to be a disposal that is similarly to other assets hence there exist the possibility of loss or gain resulting from the disposal an aspect that is deemed to be either a capital gain or loss which has its relevant tax called Capital Gain Tax, therefore these crickets capital gain or loss is calculated as;

                  Capital Gain= Sales Proceeds Less Cost

                   Crickets Sales Proceeds      $900 

                   Cost of cricket bats =         $2600

                    Capital Loss/Gain=            ($ 1500), this indeed is a loss 

The selling of the cricket bats by Jake results in a loss on disposal thus this loss needs to be netted off from taxes in that financial year or if he has any tax due that we are not aware of.

Item No. 7

Despite the fact that there exist no logbook or any paperwork showing ownership of the vehicle, Jake is still expected and allowed to claim portion of the expenses he incurred for work purposes. It is therefore certain that most of the part that of the expense incurred was for work purposes except 5% that is for private purpose hence we calculate that portion as;

Personal part=5% * 6200 = $ 310

Hence the balance from 6200 will be what Jake will have to claim for the purpose of work thus;

= $ 6200 - $ 310 = $ 5890 is what is to be claimed for tax allowance purpose.

Item 8

Even though Jake does not have the receipts of call he made its required within the law that one declared these costs rather than declining to declare the cost. He should claim the deduction but only limited to the percentage of work related calls he made in that financial year. Thus = $1,400 * 60%  = $ 840 the figure which Jake is supposes to claim. 

Calculating Tax Obligations on Different Income Sources

Item No. 9

Australian Tax Office recognizes all consultancy expenses that are deemed work related hence Jake is lawfully allowed to claim this $400 tax agency fee that was incurred for the purpose of his books of account on matters relating tax.

Item No.10

Jake gross income of 86000 is less than the threshold for medical levy surcharge for singles since we are told he does not have any health cover. But he qualifies for a medical levy contribution of 2% of his gross $86000 which is added to the tax he will be paying.  

Jake Income for Tax

For FY Ending June 2018 

                                                                                                       $                                              $

Gross Salary                                                                                                                             86000

Income from bank interest earned                                                                                                100                                                     

Unfranked Dividend Paid To Jake                                                                                             3500

Gain resulting from sales of shares                                                                                            1000                   

 Gross Income                                                                                                                        90,600

Deduction Expenses Made;

 Car/Motor vehicle expense                                                              3750

  Private Car Expense/Depreciation                                                  5890

  Telephone Expenses                                                                          840        

  Agency fee on taxes                                                                          400   

  Total Deduction                                                                                                                 (10880)

  Jake Net Taxable Income                                                                                                   79,720 

Negative gearing is a form of financial leverage that is mostly used when one is investing in property. Negative gearing involves borrowing cash to invest in an income generating asset for example rental property. The asset bought is unable to generate sufficient income to cover the loan payments, maintenance costs, interest and depreciation cost in the short term. Eventually the asset is able to generate income to cover all these cost Blunden (2016.Pg.347). The investor is able to benefit from these losses. He or She is able to offset the losses against other income generating sources. This certainly show that the investor will be earning less income, meaning he or she will have to pay less taxes at the end of the financial year. 

With the federal elections just around the corner the Australian Labor party has proposed some reforms on negative gearing. A limit has been proposed by the party to limit negative gearing to new housing as of 1^st July 2017. This is aimed at leveling the playing field for first time homeowners competing with investors and improve housing affordability Jericho (2017.Pg.2). However any property owned before 1^st July 2017 is fully immune against these changes.     

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Blunden, H., 2016. Discourses around negative gearing of investment properties in Australia. Housing Studies, 31(3), pp.340-357.

Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed. Brookings Institution Press.

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Jericho, G., 2017. The latest tax data proves it: negative gearing benefits the rich the most'. The Guardian, 13.

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Pinto, D., 2011. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

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